What happens if one person on a mortgage files bankruptcy

Financial issues can plague a family for years. When the husband has a gambling problem, the wife often pays for it. Wife with a shopping addiction? The husband's credit will suffer if she can't pay for it. Couples who work together on their portfolio enjoy success together. But they can also suffer together when one fails. This can affect your decision about getting a mortgage loan to buy your dream home. But all is not lost. A home buyer had this question recently, and we decided to explore it a bit.

Download our Get Mortgage Ready Credit guide here.

"I declared bankruptcy, not my wife. Can we still get a mortgage loan?"

The short answer is yes. The other spouse (without the credit blemish) would be the only one on the loan. So if newlyweds want a new house but the young husband had financial problems after college, the new wife will be the borrower. This of course means the wife's income is the only one accounted for in the application. 

With that in mind, it's helpful to understand information about bankruptcy and short sales in your past when it comes to getting a mortgage loan in the future. A recent short sale will keep you from getting a mortgage for about 3-to-4 years. We've talked about this before. Here's an excerpt from that article:

The mortgage banking business is based on the reliability of borrowers to pay back the mortgage notes on their homes. In other words, if you can't pay your bills, you won't be able to find financing to buy a house. Low credit scores are one measure of a person's likelihood of paying back a debt. Recent financial hardships are another. If you recently went through a short-sale, you will fall into these categories. A financial institution will not lend money to a potential borrower who, at this point, is having financial trouble (regardless of the reason behind the financial issues).

A Few Notes

  • A short sale is different from filing bankruptcy. The threshold for that is actually 2 years.
  • "Deed in lieu" is also a foreclosure.
  • If you filed bankruptcy and included the house in the bankruptcy, then you had a "bankruptcy and foreclosure," and you will have to wait 3 years from when the home ownership transferred.

You can learn more about the home buying process with the free guide below. Download "The  Credit Guide" to learn about FICO scores, improving credit and whether it's a good idea to pay off all collections or not (hint: the answer may surprise you).

Marriage is union between two people. This often means that the couple shares a financial situation. However, there are occasions where one spouse may rack up an insurmountable debt and wishes to file bankruptcy to discharge that debt. The other spouse may not be as eager to join in the discharge, or may not feel that he or she should be held responsible for the financial situation of another person.

There is no requirement that a husband and wife jointly file bankruptcy. If most debts are owed only by one spouse, it may be appropriate for that spouse to file for bankruptcy alone. However, if one spouse does file for bankruptcy in order to discharge debts, the other spouse may be held responsible for repayment of some debts, such as jointly-owned credit card debt or medical debt. This is a difficult and tricky legal situation to navigate, and it is in your best interest to contact a knowledgeable bankruptcy attorney in order to determine what each person's liability will be.

If the indebted spouse has most of the debt in his or her name alone, joint filing may not be the best option. The other spouse is not responsible for paying off the debt. Also, it may be the case that the spouse who is not in debt has numerous protected assets or may stand to inherit a great deal of money. In that situation, a joint filing may not be advisable.

A joint bankruptcy filing may be the best option if the non-insolvent spouse has few resources or has all his or her assets intermingled with the filing spouse. Filing jointly avoids unpleasant situations where the creditors attempt to reclaim the filing spouse's debts by going after the non-filing spouse's assets. Filing jointly for bankruptcy often affords couples a more simple financial transition.

A careful review of the debt structure is in order. For example, jointly owned property may be affected if only one spouse files. In most cases, both the husband and wife have the same debts or have cosigned the same loan agreements, or medical debt. If only one spouse files for bankruptcy where this is the case, the creditors can continue to demand payment from the spouse who did not file.

They type of bankruptcy a person files does not necessarily alter the responsibility of the underlying debt. If one spouse co-signed a loan for the spouse who is declaring a straight Chapter 7 bankruptcy, that spouse may still be held responsible. If the spouse declaring bankruptcy files a Chapter 13 bankruptcy, the legal and collections actions against the non-filing spouse will be suspended for the duration of the proceedings. However, the creditors will have to option to pursue the amount from the co-signer once the bankruptcy proceedings have ended. Your attorney will have the most accurate information about your particular situation.

In almost all cases, if one spouse decides to file for bankruptcy on a medical debt or a debt co-signed by both spouses, the responsibility lays with both. This may continue to be true even after a divorce, if one spouse co-signed a loan with the other or received medical services during marriage, despite the language in the divorce decree.

Questions? Call Steffens Law Office

It is in your best interest to discuss your choices with an experienced bankruptcy attorney in order to determine what your best options are. Call us today at (308) 872-8327 - our experienced and compassionate staff will answer your questions and help you get your life back on track.

What happens if a co borrower files bankruptcy?

If your cosigner is going to file for bankruptcy, you'll be responsible for the entire loan. If you don't make the payments, your credit score will suffer. Unfortunately, lenders generally won't remove cosigners from a loan account.

Can I keep my mortgage if I file bankruptcy?

The good news is that bankruptcy can protect your home, holding off a foreclosure. Chapter 13 bankruptcy is designed to allow you to keep your home, even if you are behind on payments. If you keep your house after filing for Chapter 7, the fact other debts are discharged should make it easier to pay your mortgage.

What happens if one spouse files for bankruptcy and not the other?

If a husband files bankruptcy without his wife, only the husband's debts are discharged. If the debts are held jointly, the non-filing wife will still owe even after one spouse has filed bankruptcy. The bankruptcy filing will appear on the husband's credit report, but should not appear on the wife's.

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